Recent years have brought a resurgence of interest in trade finance and financial supply chain (FSC) products and services, both in response to the increasingly cross-border nature of modern trade and as a tool for improving the performance of working capital in a bid to alleviate the impact of external pressures. Developing optimal FSC solutions to address both these needs and those of the future will require a high-powered combination of credit expertise, technology-driven functionality, strategic integration and global reach.
Of course FSC solutions have, at a fundamental level, long played a central role in overcoming the challenges inherent in international commerce. However, this area of finance has now moved to the fore. In line with the increased responsibility and remit of their positions, treasurers are realising the greater potential for improving cash cycles and responding to recent seismic shifts in the flow of global trade.
The myriad issues and market developments affecting corporates today warrant a much greater understanding of the application of traditional trade finance and more modern FSC tools. In particular, the far greater role of emerging markets in global trade – intra-emerging market (or south-south) trade is, according to a June 2012 report published by PwC now worth approximately US$2.82 trillion – has placed the spotlight on secure trade processing and enhanced supply chain transparency.
Brazil is a case in point. South America’s leading export economy, known for its wealth of commodities and a key driver of south-south trade, recently signed a trade agreement with China to encourage mutual investment and facilitate this bilateral trade flow. For corporates in Brazil this expansion of trade, which involves dealing with increasingly diverse counterparties in potentially unfamiliar economies, brings with it new risks.
For this reason document-based trade settlement tools such as letters of credit (L/Cs), and the risk-mitigation properties they offer, remain in demand despite the dramatic movement towards open account terms seen in more developed markets. Indeed, instruments such as L/Cs, stand-by L/Cs and certain short-term trade finance tools, although less efficient than open account, are vital to corporates in countries such as Brazil for minimising the risks incurred by new trade flows.
Supply chain transparency is also crucial for Brazil and other emerging economies, where growing south-south commerce warrants greater security, and in the West where buyers seek greater visibility and control over their increasingly-dispersed supply chains. A key way to achieve such enhanced transparency and control is through automating the end-to-end supply chain via an innovative electronic platform (e-platform). Although such capabilities come as standard with global providers operating in emerging markets, some domestic providers may require the assistance of their larger counterparts.
However, for corporates in the West concerns are linked to liquidity, or the lack thereof, rather than automation. While the demands of growing cross-border trade are at the centre of discussion for expanding economies in emerging markets, for western firms the on-going constraint of credit takes precedence along with sluggish growth in the US and market volatility in Europe.
Again, FSC solutions can play a vital role. As a lack of credit continues to hinder Western markets, economies in developed regions are looking for new and enhanced ways to ease their cash flows and improve their day-to-day working capital. By using advanced FSC programmes (to extend days sales outstanding (DSO) for example), treasurers can release previously trapped streams of liquidity to better-leverage existing capital.
That said, while some market pressures are popularising the use of trade finance and FSC tools, others are threatening the banking community’s ability to meet the increased demand. Indeed the third iteration of the Basel Accords, Basel III, is likely to ramp up the cost of trade finance by allocating it to the same capital adequacy risk category as demonstrably riskier business lines. This will make it difficult for providers to maintain their existing FSC offerings, let alone invest in continued innovation to meet future challenges, and it will require the combined effort of the cash and trade community as a whole to drive the industry forward.
The successful development, provision and implementation of global standard yet locally relevant FSC solutions relies on four key values – values that are every bit as essential to the full breadth of modern treasury products and services.
First of these is an expert understanding of credit; in terms of economic credit cycles, the likely impact of market developments, the movement and optimal flow of liquidity and how best to release, leverage and allocate these pools of cash. Although current market pressures will inevitably move on, new regulatory environments are likely to continue the constriction on the use of balance sheets by many financial institutions, particularly under Basel III. This could potentially hamper the growth strategies of corporates of all sizes. Improving credit efficiency will require creativity, and in the quest to unlock trapped working capital we are likely to see an increase in syndicated supply chain programmes, an expansion of self-funded programmes and greater integration of FSC solutions with capital markets instruments.
The second key value is technological capability. In an era where advancements in technology are occurring at an exponentially faster rate, it is no surprise that the most innovative FSC and treasury solutions are achieved through significant technological strength. Indeed, technology has matured from a solution enhancer to a core enabler, and sophisticated e-platforms bring invaluable functionality to both developed economy multinationals and emerging market corporates (EMCs) involved in increasing cross-border trade.
Certainly for corporates in Brazil, the speed, reliability, security and flexibility that come with automation – both for trade transactions and supply chain management – will prove increasingly valuable as trade connections with Asia and other emerging markets expand and mature. In fact, for corporates in any economy it is the range of functions enabled and powered by technology (such as extensive and speedy customisation regarding discounting rates, currency conversions and management reports) and the integration of such functionality with other banking services that will herald a new era of transaction banking.
It is this integrated approach that forms the third pillar of modern treasury services. In an increasingly globalised world, working in collaboration has already proved of considerable benefit to the industry, as market-wide debates and bank-corporate partnerships resolve mutual challenges and drive innovation. But this approach must also be used internally, as the integration of treasury products (such as FSC programmes with cash pooling options and foreign exchange (FX) conversions, for example) can create enhanced holistic solutions better-able to address the complex demands of today’s marketplace.
Fourthly and finally, there is the need for truly global solutions. As trade flows shift, emerging markets develop and pan-regional regulations come into force it is international-reaching solutions, able to support complex cross-border supply chains and cater to the needs of clients and their trading partners around the world that are invaluable and will prove vital in the future. As globalisation continues apace, it will be the ability to implement far-reaching solutions, of international standard yet which leverage local expertise that will set banks apart, boost corporate success and keep FSC and treasury solutions centre stage in the years to come.
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